This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

Latest Stories

Election to Deduct Business Startup Expenses Gets Final Rules

The
IRS on Tuesday issued final regulations (TD
9542) governing elections by individual taxpayers, corporations
and partnerships to deduct startup expenses or organizational
expenditures. The regulations adopt with a slight change temporary
regulations the Service issued in 2008 (TD 9411).

The
rules provide guidance on the application of section 902 of the
American Jobs Creation Act of 2004 (AJCA, PL 108-357), which amended
IRC §§ 195(b), 248(a) and 709(b) to allow electing individual
taxpayers (in the tax year they begin an active trade or business)
and corporations and partnerships (in the tax year they begin
business) to deduct up to $5,000 of startup expenses (individuals)
or organizational expenditures (corporations and partnerships). The
remainder of the start-up or organizational expenses can be
amortized over the 180-month period beginning with the month in
which the active trade or business begins.

The
deductible amount is reduced by the amount by which startup or
organizational expenditures exceed $50,000; in other words, no
first-year deduction (beyond the amount of amortization for the
first year) is allowed if startup expenses equal or exceed $55,000.
(For tax years beginning in 2010 only, the Small Business Jobs Act
of 2010 (PL 111-240) increased the maximum first-year deduction for
individual taxpayers (but not corporations or partnerships) to
$10,000 and the phaseout threshold to $60,000.)

Except
under provisions of the three sections, taxpayers cannot take a
deduction for startup or organizational expenditures.

The
final regulations provide the time and manner of making the
election. The election is automatic: An individual taxpayer,
corporation or partnership is deemed to have made an election to
deduct startup expenditures in the year in which it begins an active
trade or business (individual taxpayers) or begins business
(corporations and partnerships). The entity may forgo the deemed
election by “affirmatively electing” (rather than “clearly electing”
as the temporary regulations had stated) to capitalize its startup
expenses on a timely filed federal income tax return (including
extensions) for the tax year in which the active trade or business
begins or it begins business. The election is irrevocable and
applies to all startup expenditures.

The
regulations also provide guidance on the meaning of “begins
business” as applied to corporations: If activities “have advanced
to the extent necessary to establish the nature of its business
operations,” the entity is deemed to have begun business.

The
final rules are effective on their publication in the Federal Register and apply to expenditures paid or
incurred after that date. Taxpayers may also apply them to
expenditures paid or incurred after Oct. 22, 2004, to the extent not
barred by the limitation period for assessment of tax.